‘A crucial step’: Government unveils funding plan for new nuclear plants
Government touts RAB funding model as ‘win-win’ for climate and consumers, but pushing upfront costs onto energy bills could prove controversial
UK consumers are set to pay up-front for the construction of a fresh fleet of large-scale nuclear power plants through their energy bills under a new financing model unveiled by the government today, which looks set to provide a key building block of its plans to deliver a net zero energy system.
The government described the new nuclear financing plan as a “win-win” that would help de-risk and therefore encourage more private investment, while also cutting costs for businesses and consumers, helping decarbonise the power grid, and boosting jobs and growth in the sector.
It plans to table fresh legislation – a Nuclear Energy (Financing) Bill – that would be based on a model known as the Regulated Asset Base (RAB), which it said would reduce reliance on overseas developers and provide greater certainty to investors.
The RAB model, which has been widely used to fund infrastructure projects such as Heathrow’s fifth terminal and the Thames Tideway Tunnel, would see householders help pay – through their energy bills – for new nuclear power plants during the construction phase.
The new financing rules are likely to provide a major boost for EDF’s hopes of building a £20bn nuclear power plant at Sizewell C in Essex.
And, in addition to large-scale nuclear plants, the government also said the RAB model could also be used on new nuclear technologies, including Small Modular Reactors, as it sets its seeks to ramp up low carbon power capacity in support of meeting its climate targets.
Business Secretary Kwasi Kwarteng said that although the RAB model would mean consumers footing more of the upfront bill for new nuclear projects, thanks to other government net zero policies – such as on energy efficiency – the average household energy bill in 2024 would still be lower than if no action was taken at all.
“In light of rising global gas prices, we need to ensure Britain’s electricity grid of the future is bolstered by reliable and affordable nuclear power that’s generated in this country,” he said.
“Our new model is a win-win for nuclear in our country,” he continued. “Not only will we be able to encourage a greater diversity of private investment, but this will ultimately lower the cost of financing new nuclear power and reduce the costs to consumers and businesses.”
Under the previous UK financing model, nuclear developers have had to secure funding through a Contracts for Difference-type scheme (CfD), through which they only begin receiving revenue once the power station is up and running.
Such an approach has faced major challenges in recent years, however, with a slew of developers dropping out of projects – such as Hitachi’s project at Wylfa Newydd in Wales and Toshiba’s at Moorside in Cumbria – after failing to raise enough investment to get construction underway.
That has, in turn, left a headache for energy policymakers, with the UK’s ageing fleet of existing nuclear plants all on course to close down in the coming years, just as demand for low carbon, baseload electricity generation rapidly increases.
“The existing financing scheme led to too many overseas nuclear developers walking away from projects, setting Britain back years,” Kwarteng said. “We urgently need a new approach to attract British funds and other private investors to back new large-scale nuclear power stations in the UK.”
But while delivering a fleet of new nuclear power plants alongside growing renewable energy capacity in the UK is increasingly seen as crucial to the government’s Net Zero Strategy, shifting the some of the construction costs for nuclear onto consumers could well prove controversial.
Energy and climate consultant, and former civil servant, Josh Buckland, said it would therefore be crucial for the government to ensure value for money for billpayers by avoiding huge cost overruns for nuclear projects, as has frequently been seen with EDF’s Hinckley Point C plant in Somerset.
…clearly the only option to unlocking major private finance in large nuclear, said as someone who tried to negotiate various deals in Govt and failed. But how Govt ensures vfm and avoids consumers / taxpayers paying big cost overruns will be the area to watch.
— Josh Buckland (@jbuckland13) October 26, 2021
The government, however, insisted the RAB model would overall see consumers save more than £30bn over the lifetime of each nuclear power project compared to the existing funding mechanism.
Moreover, it said initial contributions from consumers towards construction of nuclear plants would help to give private investors greater certainty through a lower and more reliable rate of return in the early stages of a project, thereby “lowering the cost of financing it, and ultimately helping reduce consumer electricity bills”.
Business and industry groups broadly welcomed the announcement. The CBI’s decarbonisation programme director Tom Thackray described the new financing model as “a crucial step in building a secure, affordable and greener energy system in the years ahead”.
“The RAB model has been used successfully across UK infrastructure and has the potential to secure backing from a wide range of investors,” he said. “Getting new projects off the ground will be a huge boost to supply chains and can deliver jobs right across the UK.”
Currently nuclear power provides around 16 per cent of the UK’s electricity needs, and the government views the sector has playing a key role in reducing the country’s reliance on fossil fuels and exposure to volatile global gas prices.
The Nuclear Industry Association (NIA) also welcomed the shift towards a RAB model. The trade body’s chief executive Tom Greatrex said it was “exactly what we need to cut financing costs and get on with building stations”.
“Consumers will save money, businesses will get more predictable electricity costs, and the UK will save carbon,” he said. “This is also a clear signal to investors that the UK believes in nuclear as a green technology which is essential to our energy transition. We hope the legislation will proceed swiftly as investment is urgently needed.”
